ATR lowers Apple price target, reiterates competitive concerns

American Technology Research this week maintained a "hold" rating on shares of Apple but lowered its price target to $40, citing concerns about growing competitive pressures and high investor expectations.

The technology research firm said Apple remains the "best-positioned" to capitalize on the digital music opportunity with its complete stack of hardware, software, and service. But the firm's contacts warned of more aggressive efforts from Creative, Sony, and Samsung in the digital music player space, particularly in flash and lower capacity microdrives.

Last quarter Creative, Apple's largest competitor in the digital music player business, sold a respectable 2 million players compared to Apple's 5.3 million. Meanwhile, Sony, which some insiders believe poses the greatest threat to the iPod and Apple's digital music business, is already shipping flash-based players at the same capacity and price point as Apple's iPod shuffle, complete with display screens.

In a research note obtained by AppleInsider, analyst Shaw Wu said the consumer trend observed in March towards iPods with a lower average selling price, like the shuffle and 4GB iPod mini, will likely continue into the company's June quarter. "This is quite a contrast from previous quarters where the best sellers were at $299 and $399 price points," he said. It has been noted that Apple's profit margins on the lower-cost players are significantly less than those of its hard disk-based players.

"The $99 512MB iPod shuffle appears to be the best-selling iPod in newer channels outside of Apple channels (Apple stores and online store) including international," the analyst said. His checks indicate strong demand at Best Buy, Circuit City, and Dixons. But Wu said sales of the $149 1GB iPod shuffle are not as robust as there were when the product was first introduced. He attributes the decline in demand to price cuts on the 4GB iPod mini, which now retails for just $50 more than the 1GB shuffle at $199.

Additionally, Wu said that despite price cuts, sales of 30GB and 60GB iPod photo at $349 and $449 price points respectively, continue to be lackluster relative to the rest of Apple's iPod line. "We believe the high price points and lack of ability to listen to music and view photos at the same time on the iPod itself may be the primary reasons for weaker sales," the analyst wrote in his report.

As a result of the aforementioned concerns, American Technology Research lowered its price target on Apple shares from $46 to $40. This new target reflects 20x the firm's 2006 earnings-per-share estimate of $1.53 plus $8.23 in net cash per share. "We believe a 20x multiple is more reasonable and realistic as we believe it reflects the risk that Apple's growth could slow to 15-20% in fiscal year 2006, down from its current 70% year-over-year level."

"We believe the 25-30x multiple some are projecting may prove too aggressive," the firm said.

Apple stock traded down 10 cents, or 0.28%, in afternoon trading on the Nasdaq Stock Market.